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Double Dividend in an Endogenous Growth Model with Pollution and Abatement

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Abstract

This paper discusses wether by implementing an environmental tax reform, a government may achieve a double dividend. We consider the simplest endogenous growth model (AK model) and include a negative environmental externality in the utility function. Pollution flow can be reduced by means of private abatenment activities. There is a predetermined non-optimal level of public spending financed by environmental taxes and pre-existing taxes on income and consumption. The major contribution of the paper is to show that, under this simple framework, a double dividend may arise if tax reform consists of substituing environmental tax for income tax, in such a way that the government budget constraint holds in a present value sense.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/15.

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Length: 44 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_15

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Keywords: Environmental tax reform; Double dividend; Abatement activities.;

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  1. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  2. Thomas F. Cooley & Gary D. Hansen, 1991. "Tax distortions in a neoclassical monetary economy," Discussion Paper / Institute for Empirical Macroeconomics 38, Federal Reserve Bank of Minneapolis.
  3. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
  4. Pecorino, Paul, 1995. "Tax rates and tax revenues in a model of growth through human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 527-539, December.
  5. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  6. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental tax reform and endogenous growth," Discussion Paper 1994-98, Tilburg University, Center for Economic Research.
  7. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  8. Novales, Alfonso & Ruiz, Jesus, 2002. "Dynamic Laffer curves," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 181-206, December.
  9. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March.
  10. S. Proost & D. Regemorter, 1995. "The double dividend and the role of inequality aversion and macroeconomic regimes," International Tax and Public Finance, Springer, vol. 2(2), pages 207-219, August.
  11. Smulders, J.A. & Gradus, R.H.J.M., 1993. "Pollution abatement and long-term growth," Discussion Paper 1993-73, Tilburg University, Center for Economic Research.
  12. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
  13. Ligthart, J.E. & Ploeg, F. van der, 1994. "Pollution, the cost of public funds and endogenous growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-376258, Tilburg University.
  14. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  15. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
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